Keep Trade With Korea Free
In their summit next week, President Donald Trump and South Korean President Moon Jae-in are expected to renegotiate a landmark free-trade agreement the two countries struck 10 years ago, known as Korus. Trump has called it a "disaster," a "job-killing" deal and "a horrible deal made by Hillary." He even claimed it "destroyed 100,000 jobs."
He's wrong on pretty much all those counts. Although Korus can still be improved, it has largely benefited both sides. Trump shouldn't "terminate it," as he's vowed. He should strengthen it.
The agreement, negotiated and signed under President George W. Bush in 2007 and renegotiated under President Barack Obama, went into force in March 2012. It slashed tariffs on a range of goods, substantially expanded trade between the two countries, and bolstered protections for labor and the environment. Contrary to Trump's claim, Korus has actually resulted in a net gain of 2.6 million private-sector jobs.
Trump's claim comes from a blog post by the Economic Policy Institute, which says that the U.S.'s growing trade deficit in goods with Korea has led to the loss of more than 95,000 American jobs. And it's true that the deficit has increased to $27.7 billion, which is why Trump thinks the deal is one-sided (although relatively minor compared to the U.S.'s $68.9 billion deficit with Japan or its $347 billion deficit with China).
But this isn't necessarily a bad thing. The fact is, U.S. imports of Korean vehicles, electronics and pharmaceuticals are simply more valuable than Korean imports of American machinery, aircraft or medical instruments. Consumers in both countries are getting what they want at better prices.
And while the goods trade deficit may be up, so is the services trade surplus -- which the EPI calculation ignores. Thanks to Korus, U.S. exports of services to Korea, such as travel and intellectual property, have risen by nearly 30 percent, resulting in a surplus of $10.7 billion. According to the Office of the U.S. Trade Representative, American direct investment in Korea rose by 3.3 percent from 2014 to 2015, while Korean FDI in the U.S. rose 0.5 percent.
More to the point, Korus wasn't the reason that the goods deficit rose. Thanks to slower economic growth in South Korea, imports would've shrunk anyway. If not for Korus -- which lowered barriers to American exports -- the deficit would probably be much worse.
A final benefit is that Korus offers the U.S. a crucial geopolitical link in Asia, where China is widening its influence, North Korea is escalating its military provocations and South Korea is questioning America's commitment in the region. Now is the time to strengthen, not soften, that commitment.
None of which is to say that the deal is without flaws. As detractors point out, Korea still subsidizes its farmers, to the disadvantage of their U.S. competitors. Its automobile standards and regulations are so unclear that they act as effective trade barriers. Transparency and oversight are so lacking that domestic stocks are subject to a "Korea discount," or a persistent undervaluation needed to attract foreign investors. Finally, there's the dominance of chaebol, or politically connected conglomerates, which own more than half of Korea's stock market.
But these are all areas for improvement, which should be Trump's aim. If anything, South Korea's problems -- too much red tape, a lack of transparency, unfair subsidies -- stem from too much government meddling in trade matters. In other words, the problem with Korus is that it doesn't go far enough.
Renegotiating should mean leveling the playing field for U.S. farmers and automakers, so both sides can gain freer access to businesses and customers and compete more fairly. It should mean ensuring that the free-trade deal is more truly free, rather than trying to alter a bilateral deficit that largely reflects supply and demand.
Speaking at Kansas State University in 1978, Milton Friedman opened with an old chestnut: "If you have two economists in one room you are bound to have at least three opinions." But he added there's one topic about which that isn't true. When it comes to free trade, he said, "economists have spoken with almost one voice for some 200 hundred years." That's because, in general, there aren't winners and losers in such deals, as Trump always claims. Everybody wins.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
David Volodzko at firstname.lastname@example.org
To contact the editor responsible for this story:
Timothy Lavin at email@example.com